Which of the following will happen when the economy makes the transition from its short-run equilibrium to its long-run equilibrium? (Note: Donot adjust the graphs to reflect the transition to the long run.) Check all that apply.The price level will remain unchanged.The demand for money will rise.The equilibrium interest rate will fall.Is this analysis consistent with the proposition that the money supply has real effects in the short run but is neutral in the long run?YesNo 2. Problems and Applications Q2The Federal Reserve decreases the money supply by 5 percent.On the following graph, use the theory of liquidity preference to illustrate the impact of this policy on the interest rate.Interest RateMoney SupplyHPrice LevelQuantity of MoneyLRASMoney DemandOn the following graph, use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on outputand the price level in the short run.Aggregate SupplyAggregate DemandQuantity of OutputAggregate Demand0Aggregate SupplyMoney DemandLRASMoney Supply?

The increase in money supply means that the consumers have liquid finances in their hands. With more…

Which of the following will happen when the economy makes the transition from its short-run equilibrium to its long-run equilibrium? (Note: Do not adjust the graphs to reflect the transition to the long run.) Check all that apply. The price level will remain unchanged. The demand for money will rise. The equilibrium interest rate will fall. Is this analysis consistent with the proposition that the money supply has real effects in the short run but is neutral in the long run? Yes No

Which of the following will happen when the economy makes the transition from its short-run equilibrium to its long-run equilibrium? (Note: Do not adjust the graphs to reflect the transition to the long run.) Check all that apply. The price level will remain unchanged. The demand for money will rise. The equilibrium interest rate will fall. Is this analysis consistent with the proposition that the money supply has real effects in the short run but is neutral in the long run? Yes No

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter34: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 6PA

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Exhibit: Shift in Aggregate Demand LRAS SRAS AD CAD AD In this graph, initially the económy is at point E, with price Po and output Y aggregate demand is given by curve ADo, and SRAS and LRAS represent, respectively. short-run and long-run aggregate supply. Now suppose the Fed decides to reduce the money supply. The economy moves first 4o point in the short-run and then, in the long-run, to point O B: C OCB A:D O D. A
The Federal Reserve expands the money supply by 5 percent.a. Use the theory of liquidity preference to illustrate in a graph theimpact of this policy on the interest rate.b. Use the model of aggregate demand and aggregate supply to illustratethe impact of this change in the interest rate on output and the pricelevel in the short run.c. When the economy makes the transition from its short-runequilibrium to its new long-run equilibrium, what will happen to theprice level?d. How will this change in the price level affect the demand for moneyand the equilibrium interest rate?e. Is this analysis consistent with the proposition that money has realeffects in the short run but is neutral in the long run?
4. The slope and position of the long-run aggregate supp curve Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increa in money growth will affect which of the following? Check that apply. Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $60 billion. E Using the purple points (diamond symbol) plot the economy long-run aggregate supply (LRAS) curve on the graph. 132 128 124 120 116 112 108 The inflation rate 104 The level of technological knowledge The quantity of physical capital The size of the labor force 100 0 + 10 20 30 40 50 60 70 OUTPUT (Billions of dollars) 80 90 100 LRAS Suppose now the government passes a law that significan increases the minimum wage. This change in policy will cause the natural rate of unemployment to, which will: Oshift the long-run aggregate supply curve to the right Not impact the long-run aggregate supply curve O Shift the long-run aggregate…
Suppose an economy is in long-run equilibrium.a. Use the model of aggregate demand andaggregate supply to illustrate the initialequilibrium (call it point A). Be sure to includeboth short-run aggregate supply and long-runaggregate supply.b. The central bank raises the money supply by5 percent. Use your diagram to show whathappens to output and the price level as theeconomy moves from the initial equilibrium to thenew short-run equilibrium (call it point B).c. Now show the new long-run equilibrium (call itpoint C). What causes the economy to move frompoint B to point C?d. According to the sticky-wage theory of aggregatesupply, how do nominal wages at point Acompare with nominal wages at point B? How donominal wages at point A compare with nominalwages at point C?e. According to the sticky-wage theory of aggregatesupply, how do real wages at point A comparewith real wages at point B? How do real wages atpoint A compare with real wages at point C?f. Judging by the impact of the money…